What’s in Your Portfolio? D versus ESG
Five years ago, I sat down with the head of Wealth Management at one the largest US banks and askes, “The movement supporting socially responsible, ESG and impact investing – I think it is going to be big one day soon. Millennials and Gen Zers are so passionate about having impact. What do you think?” He replied, “The returns are not there so it will never get big. People will continue to focus on returns and then contribute to their favorite charities to have impact.”
Fast forward to today and turns out that was not the case. Investors want to align their investments with their values and sometimes will give up performance to have impact. A recent sustainability study by Blackrock found 73% of respondents responded that sustainable investing is central to their investment strategy and $203 billion flowed into ESG Funds from January 1, 2020 to September 30, 2020.1 So clearly the world is embracing sustainable investing and that trend is predicted to increase over time.
But when you look under the hood of international equity ESG products, what are the holdings and what are the practices of the countries where the securities are located? Blackrock’s iShares ESG Aware MSCI EM ETF (ticker ESGE), with over $7 billion in AUM, has an investment objective of “Obtain exposure to large- and mid-cap emerging market stocks with favorable environmental, social and governance (ESG) practices.”2 However, the portfolio has a 43% weighting in securities that are based in authoritarian states. States that are known for human rights abuses such as forced labor, genocide, human trafficking, and discrimination against women. In this Fund alone, $3 billion is supporting authoritarian regimes under the factors of being “ESG Aware.” How this can be happening in our modern times requiring investment transparency? And are investors aware that they are funding authoritarianism with these vehicles?
It is estimated that over $1 trillion in assets currently track the MSCI and FTSE international equity indexes. Perhaps before assigning ESG scores, we should instead first ask, what is the Democracy score? The Democracy International Fund (ticker DMCY) applies the Economist’s Democracy Index as a neutral overlay which in essence enables a top-down weighting of securities’ country Democracy scores. This allows investors to get more exposure to securities located in democracies known for supporting ESG goals such as embracing environmentalism, employee well-being and diversity, and women in the Boardroom to name a few. Authoritarian renewable energy securities may check the “E” box in ESG, but what about the stolen technology and forced labor that went into building that company’s wind farm or solar panels? It’s a good time to step back, do the research, and ask “What’s in your portfolio?”
Democracy Investments is a new company focused on democracy and influencing capital flows in financial markets. The Democracy International Fund ETF (ticker symbol DMCY) provides an international portfolio re-weighted toward democracies and away from authoritarian states. DMCY seeks to track as closely as possible, before fees and expenses, the net total return performance of the Democracy Investments International Index (ticker: DMCYTR) (the “Index”).
By allocating capital based on democracy scores, we are aiming to decrease the cost of capital for democracies which will lead to increased economic growth, and the reverse for authoritarian states. Additionally, by making investment proportional to democracy scores and never dropping investment in a nation to zero, we hope to maintain a market-based incentive for democratic reforms.
Our goal at Democracy investments is to influence capital flows in a way that will encourage ALL countries to improve their democracy scores. Together, we can affirm Democracy at home by investing in it abroad.
Risk Disclosure and Important Information
Carefully consider the fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Fund’s summary or full prospectus, which may be obtained at www.democracyinvestments.com. Please read the prospectus carefully before investing. A hard copy of the prospectus can be requested by calling 877-PRO-DMCY (877-776-3279) or emailing DemocracyETF@seic.com.
Investing involves risk, including the possible loss of principal. There is no guarantee or assurance that the methodology used to create the Index will result in the Fund achieving positive investment returns or outperforming other investment products.
The fund is subject to the risks associated with International investments, which may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic, or political instability in other nations; emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume; and investments in smaller companies typically exhibit higher volatility.
The funds are distributed by SEI Investments Distribution Co, which is not affiliated with Democracy Investment Management LLC.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.